Deciding whether to buy an income stock or not based on the dividend yield can be hard. Of course, I want to get as high a yield as possible. But sometimes the yield is so high that it makes me doubt that it can be sustained. So when I found this dividend share that currently yields 20.84%, I wanted to dig deeper.
Why the yield is so high
The stock in question is the Diversified Energy Company (LSE:DEC). When I use the current share price of 69.35p and the total dividends paid out over the past year, the dividend yield is 20.84%.
A yield this high usually happens because of a couple of potential factors. The major one is a falling share price. If the dividend per share has remained relatively unchanged but the share price has dropped, the yield will be pushed higher. This isn’t a good sign for long-term dividend prospects.
The other factor could be a steady share price, but rising dividend payments. This is a great sign, with higher income from the company showing that profits are high and healthy.
For the Diversified Energy Company, it’s unfortunately the first scenario. The dividend per share payments each quarter have stayed the same. But the share price has dropped by 46% over the past year. This doesn’t bode well for the future.
Why the share price has fallen so much
It could be that a stock has been oversold by panicked investors. Yet from my research, I don’t believe this is the case. The stock has been falling in a steady way for pretty much all of the past year.
The interim report for the first half of 2023 showed that revenue was down significantly from the same period last year. For example, natural gas revenue was down by 54%, with oil also down 31%.
Another factor at play in recent months has been plenty of changes in the management team. The CFO of six years, Eric Williams, stepped down with immediate effect. There were also new promotions to senior roles. This shake up isn’t great in the short term for the stock, as the future direction of the company is uncertain.
Finally, I think it’s clear that investor sentiment just isn’t supporting the stock. Even with the move higher in the oil price recently, due to the tensions between Israel and Hamas, the Diversified Energy Company share price hasn’t been able to benefit. This tells me that investors are favouring other oil-related stocks and buying them instead.
Looking at the future
I could be wrong about the firm, and it could prove to be a great purchase right now. If commodity prices have a strong run higher and the management team make some smart strategy calls, the dividend yield could be sustainable.
However, I think this is a high-risk play. I’d much rather buy some dividend shares with a lower yield but that are trending higher. Sure, I’ll sacrifice some income potential, but I think the future me in a few years time will be thankful.
The post Is this 21% yield income stock too good to be true? appeared first on The Motley Fool UK.
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More reading
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
